The Future of The Credit Crunch - Martin Hutchinson

[Lukester]

Great summary and short term forecast by Martin Hutchinson

Link : http://www.silverbearcafe.com/private/creditcrunch2.html (http://www.silverbearcafe.com/private/creditcrunch2.html)

... So there you have it - a monetary forecast for 2008. Central banks are now committed to maintaining as far as possible the value of real estate, particularly housing in the United States and Britain, where it is showing signs of collapsing. They will thus inflate the money supply, causing retail price inflation and further commodity and energy price inflation but slowing the decline in house prices and improving the value of their locked-in holdings of bank paper and guarantees.

However, because a money supply increase by the Fed might destroy confidence in the dollar, which would force a tightening in monetary policy and prevent achievement of the central bankers' primary objective, the loosest monetary policy will come from the ECB, with the additional money created being transmitted to the US and Britain through the mechanism of the foreign exchange markets and both countries' payments deficits.

Inflation in the Euro zone will remain modest, in spite of the rapid money creation, because the euro's appreciation will reduce the price of imports to Eurozone consumers. For them, the rise in commodity and energy prices will be dampened while the prices of manufactured goods from Asia will steadily grow more competitive in the Eurozone as the euro rises against Asian currencies. Inflation will appear in the United States, in Britain, where the pound will decline against the euro but probably remain quite strong against the dollar and in India and China, whose fairly primitive monetary systems will not be able to resist the tsunami of "hot money" investment from speculators and hedge funds.

By December 2008, US and British consumer price inflation will be approaching 10% per annum, and it will be well above that level in both India and China. However there will have been no outright recession, or only a mild one. Moreover, the decline in real estate values will have been slow, and in the US will appear to be turning around (but not in Britain where London house prices, currently far more inflated than in the US, will be adversely affected by the decline in the City of London's revenues.)

Once again, central banks will have achieved a barely acceptable short term resolution to a crisis - at the cost of a lengthy and painful long-term recession, as interest rates finally have to be raised to combat a double-digit inflation that will seem to have appeared from nowhere and embedded itself unexpectedly deeply in the economies of Britain and the United States.

That however will be a problem for the new US administration that takes office in January 2009. Trichet will still be around (his term of office extends to November 2011) but the main political headaches of reversing his excessive money creation will occur in the US and Britain, neither of them under his jurisdiction. If Trichet is clever, he will move the ECB to slower money creation once US and British real estate prices have stabilized. That will allow Eurozone interest rates to rise moderately, while remaining lower than the crisis rates in the Anglosphere. Then he will be able to contrast the problems in the US and Britain with the favorable outlook for Euro zone inflation under his Presidency of the ECB.

For a French intellectual, particularly an ENArque (the exclusive Ecole Nationale), proving such superiority to the Anglosphere is always the most satisfying outcome of all!

Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site http://www.greatconservatives.com/

[Lukester]

THE "COMMODITY SUPER CYCLE" - Ready to Rumble in 2008 by Gary Dorsch - Editor, Global Money Trends Magazine - January 2, 2008


“A trend in motion, will stay in motion, until some major outside force, knocks it off its course.” After gyrating within a sideways trading range over the past 18-months, the “Commodity Super Cycle,” measured by the Dow Jones-AIG Commodity Index, (DJCI), resumed its upward course in the second half or 2007. Led by the agricultural, energy, and precious metal sectors, the DJCI closed at an all-time high.

According to famed hedge-fund trader Jimmy Rogers, the 20th century has seen three secular bull-markets in commodities from 1906-1923, and from 1933-1955, and 1968-1982, spanning an average of 15-years. The current bull market for the DJCI is now six-years old, and Mr Rodgers thinks the “Commodity Super Cycle” has many more years to run, albeit with some nasty corrections along the way.

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The latest commodities boom began at the end of 2001, when China’s industrial revolution was just starting. China’s voracious appetite for raw materials for its industrialization has made it the #1 consumer of copper, steel, and iron ore in the world, consuming more of theses metals than the United States and Japan combined, and ranking #2 in consumption of oil and energy products. And China’s population of 1.3 billion has become the world’s #1 consumer of soybeans.

Evidence of an impressive bull-run is stacking up, with crude oil surging 60% to $96 per barrel in 2007, and tripling since late 2003. Platinum climbed 34% to an all-time record high of $1,550 /oz, and if the world’s 500 million cars were fitted with fuel cells, the world’s platinum supply would be exhausted in 15-years. Copper was a laggard, with a 10% gain, but is still five times higher since 2003, hitting a record $8,800 /ton in 2006, while lead and tin are now at historic highs.

Agricultural commodities joined the party in 2007, with wheat futures in Chicago climbing +77%, as global demand outpaced supply, soybeans up +79%, corn up +16%, and rice futures were up +35 percent. A weaker US dollar makes American grain prices less expensive to buyers abroad, and US wheat exporters already have sold more than 90% of the 1.18 billion bushels the US Department of Agriculture expects will be exported during the whole marketing year, which ends in June 2008.

Rough rice futures in Chicago soared to all-time highs, led by strong export demand and weather-related Asian crop shortages in India, the world’s second-largest rice exporter, and in Vietnam, the third-largest shipper. Global rice supplies fell 6.5% in the fourth quarter alone to 72.1 million tons, and according to latest estimates, supplies are headed down to 50 million tons, the lowest level since 1983-84.

Food prices are 18% higher in China from a year ago, and the Communist kingpins in Beijing, fear that runaway inflation could ignite social unrest. The price of pork, which forms the core of most Chinese diets, was up a staggering 56%. “We’re facing a grave situation,” said Ma Kai, the country’s top planner. China has a fifth of the world’s population, with 1.3 billion people using 7% of the world’s farmland.


186

Zheng Guogan, head of the State Meteorological Administration forecasts global warming will cut China’s annual grain harvest by up to 10 percent. That would mean about 50 million tons less grain in the current tight supply situation and a potential for further food inflation in world markets. “Given the tightened food supply in the international market, a decline in domestic grain production could lead to more price hikes,” said Song Tingmin, VP of the China National Association of Grain.

The US Department of Agriculture has also cut its estimate of world wheat stocks for 2007-08 to 112.4 million tons, a 30-year low. If sustained, sharply higher wheat prices will eventually work their way into the grocery aisle for bread, cereal, cookies and other products. Fearing a further rise in prices, India, Pakistan, Egypt, Morocco, Algeria, Indonesia and Iraq have all booked large cargoes of wheat.

And it’s not just the Fed’s weak US dollar policy that is driving up agricultural prices to record highs these days. Growing Bio-fuel demand has pushed up corn and soybean prices, and creating a linkage with crude oil. Furthermore, the cost of transporting dry goods such as coal, iron ore, and grains overseas, as measured by the Baltic Dry Index, have doubled from a year ago. Higher transportations costs, by land or by sea, are expected to be eventually passed along to the final consumer.

Riding on the wings of the “Commodity Super Cycle” and global inflation was the glittering Gold market, up 32% in 2007. Gold was energized by reckless central bankers and the explosive growth of the world’s money supply. In Australia, the M3 money supply rose 20.7% from a year ago, Brazil’s M3 +17%, Canada’s M3 +12.9%, China’s M2 +18.5%, the Euro zone’s M3 +12.3%, Hong Kong’s M3 +31.5%, India’s M3 +21.5%, and the USA’s M3 +15.8%, a 47-year high.

Chinese and Indian Imports fuel “Commodity Super Cycle”

Maybe, the longevity of the “Commodity Super Cycle,” boils down to one simple equation. According to the latest population count by the United Nations, the world had 6.5 billion inhabitants in 2005, 380 million more than in 2000, or an annual gain of 76 million persons. By 2050, the world is expected to house 9.1 billion persons, assuming declining fertility rates. So a world of finite raw materials, along with an increasing population base, translates into higher commodity prices. China and India house one-third of the world’s population with 2.3 billion inhabitants.


187

In an ironic twist, China has become a victim of its own phenomenal success. China’s economy expanded at a blistering 11.5% last year, but was plagued with a 7% inflation rate, largely linked to the country’s voracious appetite for global commodities. China’s imports climbed 20.5% to $865.5 billion in the first 11-months of 2007, from the year earlier period, and Chinese demand effectively put a floor under the DJCI, whenever panicky commodity traders in London, New York, Tokyo, or Shanghai got the urge to turn paper profits into cash.


188

To combat consumer inflation, the People’s Bank of China (PBoC) has tightened its monetary policy, ordering banks to set aside 14.5% of their deposits as reserves, an all-time high. The PBoC also raised bank lending rates five times to 7.47%, and announced a special bond sale of 750 billion yuan to drain cash from the financial system. The latest tightening moves took some steam out of the Shanghai stock index, which still ended 97% higher last year, the world’s gold medal winner.

Then on Dec 27th, China’s central bank signaled it would allow the yuan to appreciate faster in 2008, in a move designed to lower the cost of dollar denominated commodities imported from overseas. Yao Jingyuan, chief economist of the state statistics agency, explained, “The weakening dollar and rising global commodity prices would create inflationary pressures for China next year, but a quicker appreciation of the yuan would probably help offset some of those price increases.”


189

But a stronger yuan vs the US$ will also boost China’s purchasing power abroad, and could exert more upward pressure on commodity prices worldwide. And China must compete with India, the world’s second fastest growing economy, with one billion consumers for global commodities. India’s imports rose to $20.8 billion in October, up from $4.6 billion in February 2004, also supporting the commodity markets.

Interestingly enough, India could face a supply shortfall of about 4-million tons of rice in 2008, threatening to turn the world’s largest exporter of rice into a net importer. With tight supplies of wheat this year, Indian demand for rice could grow to 96 million tons or higher, and above the rice crop of 92 million tons last year. India is also Asia’s third-largest oil consumer, and imported 9.25 million tons of crude oil in November, or 2.8 mil barrels per day, up 6.5% from a year ago.

Bernanke Fed Re-Ignites “Commodity Super Cycle” in 2007

For 24-months until June 2006, the Federal Reserve embarked on a long, but predictable road of lifting short-term US interest rates, to reach an unknown “neutral rate,” that would neither stimulate nor weaken the US economy. The Fed was also tracking the “Commodity Super Cycle” and appeared to have finally gotten ahead of the inflation curve with its last rate hike to 5.25% in June 2006.

“The Fed will be vigilant to ensure that the recent pattern of elevated monthly core inflation readings is not sustained,” declared Fed chief Ben “B-52” Bernanke at the International Monetary Conference on June 6, 2006. “The Fed must continue to resist any tendency for increases in energy and commodity prices to become permanently embedded in core inflation,” he said, telegraphing the last rate hike to 5.25%.

http://www.financialsense.com/fsu/editorials/dorsch/2008/images/0102/0102.h9.jpg

[ 6 ]

The 2-year cycle of Fed rate hikes was the longest in a quarter of a century, and finally put a dent in the “Commodity Super Cycle.” Crude oil tumbled $30 per barrel, and gold fell $160 /oz in the second half of 2006. The Fed had finally corralled the “Commodity Super Cycle”, and put the fed funds rate on ice for 15-months. The Fed relied on other G-20 central banks to tighten their monetary policies to keep the “Commodity Super Cycle,” in check, while it sat on the sidelines.

However, other G-20 central banks were reluctant to tighten their money spigots, and only lifted their lending rates in tiny baby-steps, that failed to rein-in double digit credit and money supply growth. Central bankers were clandestinely inflating their economies to prosperity, by pumping up stock markets with monetary steroids, and in turn, hoping to bolster consumer confidence and spending.

However, the bursting the $1.8 trillion sub-prime credit bubble in the summer of 2007, rattled the Bernanke Fed into a series of rate cuts totaling 1% to 4.25%. The Fed’s aggressive rate cutting campaign knocked the US dollar index to 20-year lows, and ignited the fastest money supply growth in 47-years, with US M3 hitting an annualized 16% in November, while the narrower MZM money supply soared to +12.8% higher from a year earlier.

http://www.financialsense.com/fsu/editorials/dorsch/2008/images/0102/0102.h10.jpg

[ 7 ]

Because most international commodities are traded in US dollars, the Fed must defend the value of the US dollar in the foreign exchange market, with higher interest rates if necessary, to keep the “Commodity Super Cycle” in check. But with the Fed moving in the opposite direction, and slashing the fed funds rate to 4.25%, the US central bank let the inflation genie out of its bottle, awakening the “Commodity Super Cycle” from its 18-month siesta.

Thus, the finger of blame for global inflation points to the Bernanke Fed and the US Treasury, for engineering the devaluation of the US dollar in the second half of 2007. Traders should only trust the money that flows thru the commodity markets for real time indications of future inflation, and not government statistics, which are manipulated by apparatchniks and adopted as gospel by the mainstream media.

http://www.financialsense.com/fsu/editorials/dorsch/2008/images/0102/0102.h11.jpg

[ 8 ]

Money supply growth is explosive, at a time when inflation is rearing its ugly head across the globe, led by sharply higher food and energy prices. European and US central bankers are intellectually dishonest about food and energy prices, routinely subtracting the “essentials of life” from their inflation equations, reckoning that commodity price spikes are self-correcting, due to the laws of gravity, and shouldn’t be countered with higher interest rates.

In the US, producer prices were 7.7% higher in November from a year ago, the highest in 34-years. Consumer prices rose at an annual rate of 4.2% through the first 11-months of 2007, the most in 17-years, thanks to soaring food and energy prices. Yet remarkably, federal funds futures traders in Chicago are betting on a quarter-point Fed rate cut to 4.00% on January 30th, to bail out Wall Street bankers from massive losses in sub-prime mortgages, despite dangerously elevated inflation.

There’s a big difference between the way US households and the Fed view inflation. To the average household, food and energy prices are the most closely watched costs. To the Fed, food and energy are subject to cyclical swings and ignored. “If inflation expectations are well anchored, changes in energy and food prices should have relatively little influence on core inflation,” Fed chief Ben “B-52” Bernanke told the National Bureau of Economic Research on July 10th, 2007.

So far, investment banks and brokers have recognized $97 billion of losses, related to the collapse of the $1.8 trillion sub-prime mortgage market. That could just be the tip of the iceberg of bank write downs for 2008. But additional Fed rate cuts could weaken the US dollar, and unleash the fastest rate of inflation and money supply growth that the world has seen in decades, - leading to the “Stagflation” trap.

EUROPEAN CENTRAL BANK FUELS GLOBAL INFLATION

Under the leadership of Jean “Tricky” Trichet, the European Central Bank has veered far away from its monetarist roots and its original 4.5% growth target for Euro M3. Since Trichet got his hands on the printing presses in November 2003, the Euro M3 money supply has exploded from a 5% growth rate to an annualized 12.3% in October, its fastest in history, lifting the Euro zone’s inflation rate to a six-year high of 3.1%, and far above the ECB’s target of 2%.

Trichet has immunized the Euro zone stock markets from record high oil prices with carefully calibrated dosages of monetary morphine. The ECB engineered an 11% Euro rally against the US dollar in 2007, by running the printing presses at a slightly slower pace than the Bernanke Fed. Still, North Sea Brent crude oil rose to a record 65 euros per barrel, and European wheat futures closed at 248 euros, posting a 68% gain on the Paris-based Euronext exchange.

ECB chief Trichet and his sidekick Bundesbank chief Axel Weber have forgotten the sound advice of the late ECB chief Wim Duisenberg, “Trying to use monetary policy to fine-tune economic activity or asset markets, or to gear it above a sustainable level will, in the long run, simply lead to rising inflation - not to faster economic growth,” Duisenberg warned on Sept 5, 2003, just before he retired from the ECB.

http://www.financialsense.com/fsu/editorials/dorsch/2008/images/0102/0102.h12.jpg

[ 9 ]

With Euro zone inflation getting out of control, Trichet and Weber are conducting “open-mouth” operations thru the media, talking tough and making bold threats, but taking no action to tighten monetary policy. European gold traders have seen through the ECB’s propaganda and empty rhetoric, and are bidding 570 euros for an ounce of gold, up 75% from just three years ago.

Writing in Germany’s Bild am Sonntag newspaper on Dec 31st, Bundesbank chief Axel Weber said that high energy and food prices would keep inflation elevated through the first half of 2008, but warned European workers not to ask for higher wages to compensate for the higher cost of living. “The current, unusually high inflation rates in Germany and the Euro zone must not be the yardstick for the next wage round. A spike in prices as a result of excess wage rises can endanger medium-term price stability. We would act decisively against this,” he warned.

“Our primary goal is to preserve price stability. We are alert and everybody must know that we will do whatever is needed to deliver price stability in the medium term and be credible in that delivery. The single needle in our compass is price stability,” warned ECB chief Trichet on Dec 14th. But alas, the ECB’s compass has been broken for three years, with Euro money and credit expanding at double digit rates.

How are we to interpret the ECB’s latest riddles, designed to keep commodity and gold speculators off balance. Would the ECB actually hike its repo rate to 4.25% to rein-in its money supply, when other G-7 central bankers in Canada, England, and the US are lowering their lending rates? That’s doubtful. Yet the ECB would look like a hawk, by simply resisting the temptation to follow the rate-cutting Bernanke Fed and the Bank of England, by leaving its repo rate unchanged at 4.00 percent.

http://www.financialsense.com/fsu/editorials/dorsch/2008/images/0102/0102.h13.jpg

[ 10 ]

Still, “the persistence of the current inflation shock entails the serious risk that inflation expectations could become unhinged and our credibility as central bankers could be significantly damaged,” Bank of Spain chief Miguel Angel Fernandez Ordonez warned. Spain’s consumer price index soared to +4.1% in November. “We are monitoring the situation very closely, and are permanently alert. Central bankers, even the best ones, cannot prevent an increase of oil prices or other international commodities,” said Belgian central banker Guy Quaden on Dec 13th.

That’s music to the ears of global commodity traders, and why the world economy could be headed for hyper-inflation. “Central bankers always try to avoid their last big mistake. So every time there’s the threat of a contraction in the economy, they’ll over stimulate the economy, by printing too much money. The result will be a rising roller coaster of inflation, with each high and low being higher than the preceding one,” said Milton Friedman, the late Nobel monetarist.

“Inflation is always and everywhere a monetary phenomenon. As the government increases the rate at which it prints money, the result is too much money chasing too few goods and services. Higher wages don’t cause inflation, and the whopping oil price increases between 1973 and 1980 didn’t cause the stagflation, - a stagnant economy with rising inflation. Rather, the oil price hikes were the form inflation took” from rapid money supply growth, Friedman and Anna Schwartz argued.

Gold is a Safe Haven during US Banking Crisis

Nowadays, bankers are so afraid to lend money to each other, that they prefer to park their excess cash in “safe haven” Treasury bills and notes, even at negative rates of return, after adjusting for inflation. Big banks are reluctant to lend money in the LIBOR market, because of suspicions that borrowers might be holding big undisclosed losses in toxic sub-prime mortgages.

Global banks are also hoarding cash to plug future losses that must be written off their balance sheets in the year ahead. The fear factor in the banking system is measured by the TED spread, which is the difference for yields on US$ Libor rates (ie Eurodollar rates) and for US Treasury bills. Since August, there have been two eruptions in the TED spread that lifted US$ Libor rates to +210 basis points above 3-month Treasury bills rates, the highest since the 1987 stock market crash.

http://www.financialsense.com/fsu/editorials/dorsch/2008/images/0102/0102.h14.jpg

[ 11 ]

Gold has done a reasonable job of tracking widening credit spreads between Libor rates and Treasury bills, and acting as a safe haven in a time of risk-aversion in the stock markets. Yet the same sophisticated bankers that bought $1.8 trillion of toxic sub-prime mortgages over the past few years are now locking in 10-year bond yields below the inflation rate, even though hyper-inflation might lie on the horizon.

When measured in “hard money” terms, the US Treasury’s 10-year Note lost 20% of its value compared to an ounce of gold since August 2007. Wouldn’t it make better sense to park excess cash in gold, rather than US Treasury IOU’s, during periods of double-digit money supply growth, and soaring commodities?

Gary Dorsch - Editor, Global Money Trends Magazine

http://www.financialsense.com/fsu/editorials/dorsch/2008/0102.html

[Rajiv]

Chinese and Indian Imports fuel “Commodity Super Cycle”

Maybe, the longevity of the “Commodity Super Cycle,” boils down to one simple equation. According to the latest population count by the United Nations, the world had 6.5 billion inhabitants in 2005, 380 million more than in 2000, or an annual gain of 76 million persons. By 2050, the world is expected to house 9.1 billion persons, assuming declining fertility rates. So a world of finite raw materials, along with an increasing population base, translates into higher commodity prices. China and India house one-third of the world’s population with 2.3 billion inhabitants.


An appendage to this is this article - Food production: land, population and water (http://www.eafl.org.uk/default.asp?topic=OilFood)

Colin Tudge’s So Shall We Reap (http://www.amazon.com/everyone-thousand-practice-immediate-descendants/dp/0141009500) gives as clear a description as any of the effect of population growth on our food system. The world’s population will continue to grow to a peak of 9Bn in the middle of this century. Yet most of the land in the world which will sustain agriculture is already being used.

In fact, the resource is shrinking because of soil erosion. One estimate is that in 40 years (from the 1950s to 1990s), 30 percent of the world’s arable land has been lost. In the past this happened most in less-populated countries such as Saudi Arabia, but increasingly it is happening in populous countries such as China.

At the same time, climate change will reduce yields – some crops for instance yield 10% less for every 1 degree rise in temperature. More catastrophically, sea-level rises could wipe out a huge proportion of the world’s best arable land, including in the UK. Lack of water in the world’s hottest countries will make those countries increasingly reliant on exports of grain from temperate countries like Europe – even Britain may need to become a net exporter of food rather than a net importer.

Even where arable land remains, its yield is declining steadily as a result of modern agricultural methods, especially (again) through soil erosion. Arable land typically has around 8” of fertile soil. For each 1” of this which is lost, yields decline by around 10% . In particular, soils have lost organic matter, which is essential to hold water and nutrients for plants. Studies have shown that soils high in organic matter can hold the water from rain (and especially from heavy rainfalls) many times more effectively than barren soils. So the loss of soil organic matter (as well as tree cover etc) is responsible for both drought and flooding. Soil organic matter also greatly reduces the rate of soil erosion, and may even prevent it.

At present the world’s arable farmers compensate for the loss of natural soil fertility by adding fertiliser. We will need to decide, in future, whether precious energy can be used in this way. It would be better to build soil fertility by adding organic matter, and make use of natural fertilisers (ie by returning animal and human manure to the land), than to expend energy on artificial ones.The other important way in which arable land is being lost is to development, such as housebuilding, roadbuilding and airports. Already some 20% of the world’s best land has been used in this way. The UK’s plans to build huge new housing developments in the East and South-East of England are both suicidal, in the sense that they will use up precious high-quality land, and pointless, in the sense that London will soon be shrinking rather than growing. Similarly plans for new roads (including bypasses) and airports are both wasteful of good land, and anachronistic at a time when traffic is bound to reduce.The current drive to biomass ignores these pressures on the land

[Lukester]

Rajiv -

I'm trying to puzzle out what happens to USD / GOLD as the Euro temporarily becomes the "locomotive" for inflation of monetary aggregates in 2008. As they try to shore up any threatening avalanche of decaying bank holdings of bad mortgage derivative paper, these two articles both surmise the ECB will be trying to give the FED a little air or wiggle room to defend the USD without being forced to impose draconian interest rate increases.

Of course the reasons at the ECB are more complicated (calculations of self interest) than merely wishing to assist the FED. But there is more than a hint in there that the USD might strengthen against the Euro.

So it would suggest that this could well be the "kickoff" signal for gold to definitively decouple from acting as the mere "anti-dollar", and you'd then see a "USD up, plus GOLD up" scenario. That would accrue a lot of attention to gold.

[c1ue]

http://stlouisfed.org/news/speeches/2006/PDF/07_31Fig3.pdf

According to this, in 2004 China was the 3rd largest exporting nation in the world behind the US and Germany, clocking in at $593B and 6.5% of total world exports.

In contrast the United States exports around $818.8B and 8.9% of world share with Germany at $912.3B and 10% being the export leader.

The parent speech from our favorite Bill Poole (:rolleyes:) says:

http://stlouisfed.org/news/speeches/2006/07_31_06.htm

In 2005, the Chinese GDP exceeded $8 trillion, which was roughly two-thirds the U.S. GDP.

So using these same numbers, China's exports account for 6.7% of their economy. In contrast, the US' exports are 6.1% of the economy and Germany an astounding 35.7%.

So it seems the China commodity boom would continue right?

Well here's the big question in my mind:


Country 2005 avg. income 2005 exports/person exports/income%
China $1,740 $449 25.8%
USA $43,740 $2,839 6.5%
Germany $34,580 $11,071 32%


Then add this info:


Country 2005 food expenditure per capita* (FEPC)($) FEPC (%)
China** 42.9% $746
USA 12.8% $5,599
Germany 13.1% $4,545^

* per capita information derived from household information - percentages assumed equal between households and per capita
** China data: 40% spending for urban vs. 45% for rural, 745M rural vs. 560M urban =
^ 2003 data, 303 Euro/month expenditure, 0.8 Euro/$ exchange rate

42.9% spending for food per capita + 25.8% of GDP dependent on export - that doesn't seem to leave a lot of disposable income for future commodity purchases, or purchases of any kind should a US-led world recession ensue.

--------------------------------------------------------------------

2005 income info from: http://www.finfacts.com/biz10/globalworldincomepercapita.htm

Germany food consumption info from:
http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2005/11/PE05__476__632,templateId=renderPrint.psml

China food consumption info from: http://www.ers.usda.gov/publications/err32/err32b.pdf

China urban vs. rural populations: http://media.gallup.com/WorldPoll/PDF/WPChinaTFExecSummary.pdf

[Lukester]

C1ue -

I'm not competent to answer or speculate on this with any assurance other than a personal hunch. My instinct tells me Jim Rogers is going to be right, all the way to the bank, on every sector of commodities for years to come.

Commodities will be underpinned by both monetary and fundamental reasons - and the fundamental reasons will surprise at some point, and thoroughly outstrip the monetary ones (permanently) in terms of the prices those commodities can and will extract from a shocked and unwilling world.

Somehow I just don't buy all the reasons why BRIC nation commodities demand is a house of cards built on the grossly imbalanced US consumer acting as the lynchpin of global consumption. It ain't gonna work out that way. If you rig your sails to catch that eventuality I think there is a good chance that events will wind up throwing a curve ball at you.

[jk]

commodities will sell off in a global recession. part of e.g. china's demand rests on an upgrading diet which in turn is based on rising incomes. in the face of lower demand for china's exports, china will no longer be upgrading its diet, this will reduce demand for feedgrains as animal protein will be in less demand. the long term story still makes sense, and i think all the commodities are in a long term secular bull market, but don't deceive yourself into thinking there might not be major drawdowns along the way.

[grapejelly]

commodities will sell off in a global recession. part of e.g. china's demand rests on an upgrading diet which in turn is based on rising incomes. in the face of lower demand for china's exports, china will no longer be upgrading its diet, this will reduce demand for feedgrains as animal protein will be in less demand. the long term story still makes sense, and i think all the commodities are in a long term secular bull market, but don't deceive yourself into thinking there might not be major drawdowns along the way.

Great post.

I think that this is where gold and perhaps silver will fork off into their own, and decouple from other "commodities" that they are often lumped in with today.

In other words, in a global recession, when compared to the value of cash, gold and silver will rise, while farm commodities, oil and base metals prices will fall (against cash), at least for awhile.

[jk]

Great post.

I think that this is where gold and perhaps silver will fork off into their own, and decouple from other "commodities" that they are often lumped in with today.

In other words, in a global recession, when compared to the value of cash, gold and silver will rise, while farm commodities, oil and base metals prices will fall (against cash), at least for awhile.
pm's may well sell off too - it depends on whether the market can look past the "deflation" rhetoric to the wall of money coming down the road. i plan to hold my pm's - currently 29% - but this possibility has prevented me from buying even more.

[c1ue]

Lukester,

There's nothing wrong with hunches, but their ain't nothing right about them either. Guesses are guesses.

Read the USDA link - there is some very detailed information there which may give you cause to reconsider.

As for Rogers - I never consider the 'pedigree' of anyone who benefits from other people following their advice.

At the end of the day, Rogers - and every other financial manager - benefits more from others doing what they're told is 'good' as opposed to personal investments.

Then there is the whole hogging the spotlight possibility.

The best con artists don't lie - they use the truth to get their way.

The same applies for anyone asking you to do something they want with your money.

[jk]

rogers talks his book, no doubt. but we haven't heard that he's selling what he's been talking up in public, as has been the case with various corporate titans.

[Lukester]

OK, here's one for all you commodities "chicken littles". :D


CRB False Witness
Adam Hamilton
January 4, 2008


Around 33 centuries ago, one of the most famous men in history hiked up a mountain probably now known as Jabal al Lawz in today’s northwestern Saudi Arabia. There Moses met with God. God Himself carved commandments into stone tablets for Moses to share with His people, the Israelites. These commandments eventually became a major part of the legal foundation for western civilization.

One of these commandments preserved in the book of Exodus is “You shall not bear false witness against your neighbor.” While most obviously commanding us not to lie, I believe this commandment goes well beyond lying. It probably also includes presenting true information in such a way that it will likely mislead when interpreted. A modern word that comes to mind along these lines is “nuancing”.

Sadly the financial markets are full of this kind of thing. Charts, with their wealth of information, are one of the easiest ways to intentionally mislead others. Depending on the analyst’s selection of data to use, time period to cover, axis type of chart (linear or logarithmic), and vertical axis span, the obvious interpretation of a chart can vary radically. It is not hard to present true information yet know it will be misinterpreted.

I have a personal anecdote on this. When I was around 13 years old or so, one of our national Senators came to speak at my school. This was well before the PowerPoint days so he presented his charts on big sheets of paper on easels. The Senator showed us one chart with a very sharp rate of increase. After he finished, I walked down to the front of the gym to take a closer look. It turns out his vertical axis wasn’t zeroed.

What had looked like a mammoth 500% increase from the crowd was probably less than 10% when the tiny-labeled non-zeroed vertical axis was considered. In my young self-righteous fury, I actually wrote this Senator a letter chastising him for his misleading chart. His office even answered me. It was the first time in my life, and the last time, that I ever bothered writing to a politician. It’s as useful as talking to a turnip.

At Zeal we love charts since they offer such an awesome and unparalleled perspective. We have already custom built thousands of different charts over the years and I am looking forward to personally building thousands more. But every time I create a chart, I try to carefully consider how it will likely be interpreted. I want my charts to accurately reflect and illuminate the particular market I am researching.

Unfortunately today a terribly misleading chart is tainting perceptions of the mighty global commodities bull. I cannot count the times I have seen analysts and investors use and misinterpret it. Most of these misinterpretations are unintentional, due to simple naiveté. But disturbingly I have also seen it used to intentionally mislead when an analyst knows better. This chart bearing false witness is a big problem.

If it was an obscure chart few investors considered, I wouldn’t care all that much. But unfortunately this false-witness chart happens to be of the famous CRB index. The CRB index, of course, has been the flagship commodities index for decades. Having the CRB mislead on commodities’ true bull-market progress is as appalling as if the NASDAQ failed to reflect technology stocks’ true performance.

The reason CRB charts are bearing false witness today is because this index’s new custodians radically changed its composition back in July 2005. The CRB’s traditional equal weighting and geometric averaging among its component commodities were trashed. This tenth revision of the CRB created a new version of this index unlike any before in history. I wrote an essay back then explaining all of this (http://www.zealllc.com/2005/crbrev.htm).

The unprecedented tenth-revision CRB, or CRBr10, is utterly dominated by energy. Energy comprises 39.0% of this new index compared to 17.6% in the ninth-rev CRB, the CRBr9. So when oil corrected in late 2006, the new CRBr10 plummeted. The CRB’s total breakdown led many analysts, including long-time contrarians, to wrongly conclude this commodities bull was over. I wrote another essay (http://www.zealllc.com/2007/crboil.htm) in January 2007 pointing out how horribly flawed it was to assume the CRBr10 and CRBr9 were comparable.

After that essay, some traders graciously wrote in to tell me about the CCI, or Continuous Commodity Index. The CCI is really the traditional CRBr9 we are all used to. It was created to preserve the historical ninth-rev CRB interpretation of commodities’ performance in this new CRBr10 era. In February 2007, I wrote an essay (http://www.zealllc.com/2007/ccicrb.htm) on the CCI. I was so thankful and relieved to learn of its existence because it restored the accuracy and comparability of the traditional flagship CRB index.

Now a year later it is very disappointing to see most analysts and investors continue to focus on the new CRBr10 rather than the old CRBr9 in the form of the CCI. The CRBr10 is fine when viewed in isolation only since its July 2005 birth. But when it is grafted on to the old historical CRBr9, it bears false witness. Almost no charts acknowledge this big break in continuity and hence their obvious interpretation is hopelessly flawed.

So this week I want to revisit the true CRBr9 in its new life as the CCI versus the CRBr10. Your perception of commodities performance in 2007, and their future prospects, will be very different depending on which CRB you ponder. While commodities continue to look rather anemic from the CRBr10 perspective, they look amazing from the true historical CRBr9 perspective.

In these charts, the CRB is rendered in blue. Up until July 2005, it is the ninth-revision CRB. After July 2005, the tenth-rev CRB is grafted in. This is the way virtually all analysts today present the CRB, with no note of the huge discontinuity. Meanwhile the new CCI, the comparable continuation of the CRBr9, is rendered in red. You have to consider it to truly understand the CRB’s progress in historical context.


http://www.zealllc.com/c2008/Zeal010408A.gif


You really have to journey back in time to understand the devastating impact of the CRB’s false witness. Between late 2001 and mid-2006, the CRB index was in an absolutely beautiful secular uptrend. Its support was rock solid and never failed. If an investor wanted to know how commodities were doing as a sector, all he had to do was check out a CRB chart. Due to the natural smoothing effect of the CRB’s geometric averaging, you couldn’t ask for a nicer and tighter uptrend.

Then stealthily in July 2005, the tenth revision of the CRB index since its 1957 birth went into effect. It started trading on July 12th, a quiet time of the year when the markets don’t get a lot of attention. And there really weren’t a lot of folks talking about this transition. I wrote a single essay (http://www.zealllc.com/2005/crbrev.htm) on it, published on the quiet July 4th vacation week, and then got back to more tradable analysis. So not many traders knew the CRB had even changed.

And for the tiny fraction that did know, things didn’t look all that different initially. As this chart shows, the CRBr10 dutifully continued up within the CRBr9’s tight secular uptrend for a year after the revision happened. So by the time mid-2006 arrived, virtually everyone in this sector had long forgotten about the obscure tenth revision of the CRB. Back then we all charted the CRB across its tenth revision as if it was perfectly historically contiguous.

Then in late-summer 2006, the oil price started plummeting. In the old CRBr9 days, this index wasn’t heavily influenced (http://www.zealllc.com/2007/crboil.htm) by crude oil. Oil was only 5.9% of it by weight and the geometric averaging greatly smoothed out individual commodity impacts. But in the CRBr10 oil was suddenly its largest component by far with a massive 23.0% weighting, 4 times higher. And the traditional geometric averaging no longer existed to moderate its impact on the entire index.

For the first time in its entire bull, the CRB plummeted. It sliced through both its rock-solid support and key 200-day moving average like a hot knife through butter. Investors were shocked and terrified. Since everyone had long forgotten the CRB revision, they truly believed the same old historical CRB had violated its long secular support. The sky really was falling technically in CRB-land, so commodities Armageddon looked to be upon us.

This breakdown led to all kinds of very bearish theories on commodities. Even former commodities enthusiasts were falling all over themselves heralding the end of the commodities bull due to this high-profile CRB breakdown. But the problem was this breakdown was false. The CRBr10 was breaking down, but it wasn’t comparable to anything historically, especially the CRBr9’s uptrend. The standard trans-revision CRB chart, as presented and interpreted, was bearing false witness.

I again wrote about the new oil-dominated CRB (http://www.zealllc.com/2006/crbbreak.htm) in October 2006, trying to help investors see the real picture. But I felt like the little Dutch boy trying to plug the dike as it was hopeless trying to stop the flood of commodities despair. At that time, unfortunately I wasn’t yet aware of the CCI so I had no CRBr9 to compare to the CRBr10 in my charts. So I had to ask investors to take it on faith that the old CRB would not have corrected anywhere near as hard with oil as this new CRB did.

Before that breakdown, the CRB carved its bull high in mid-2006 which was 99% above its early 2001 lows. Since then, the headline CRB has just ground sideways. It did rally in 2007, but as of the end of the year it still hadn’t managed to eclipse its May 2006 high. To a technician, the headline CRB looks like it has just carved a massive double top ahead of a secular bear. Thankfully this is a false witness.

In these charts, the only truly comparable lines are the blue CRBr9 one up until the tenth CRB revision in mid-2005 and the red CCI one after. This is the only way the CRB index is constructed and calculated the same way to ensure perfect comparability. While the headline CRBr10 swooned, the historical CRBr9 was stronger than ever living on in the form of the CCI. The true CRBr9 just hit all-time nominal and bull highs!

In December, on fully seven separate trading days, the CCI ascended to new closing highs. They are the highest levels yet seen in this bull and the highest nominal levels ever. But if you adjust the CRB for inflation as is necessary and prudent (http://www.zealllc.com/2007/cpigold2.htm) over multi-decade timespans, this index would have to soar well over 1000 (http://www.zealllc.com/2007/crboil.htm) today to hit a new all-time real high.

Thus bull to date, the truly comparable CRBr9 was up 160% as of late last month! And technically-oriented traders should note that its secular support was never broken! Not only did the CRB not break support, but its old secular resistance actually became new higher support as the CRB broke out of its secular uptrend in early 2006 ahead of oil’s sharp correction. And that infamous oil correction really didn’t even faze the CRBr9 due to oil’s modest equal weighting and the old-school geometric averaging.

So as you can see, your interpretation of late 2006 and 2007 in commodities is radically different depending on whether you consider the new CRBr10 or the traditional CRBr9. Either way, the CRBr10 is simply not comparable to the CRBr9 in past years. So even if you like the CRBr10, and it does have its merits, it is illogical and misleading to graft it on to the CRBr9 with no explanation. Hence I propose big warning symbols on all trans-2005 CRB charts to stop them from bearing false witness and misleading investors.

This vast gulf between ninth-rev and tenth-rev CRB performance is even more interesting when viewed just since the tenth revision. The traditional CRBr9 in the form of the CCI held pretty tight with the new CRBr10 for its first quarter of existence, but then the CCI started to pull away. This gap has only continued to widen since. Actually this is rather curious considering the CRBr10’s huge oil weighting and oil’s massive upleg in 2007.


http://www.zealllc.com/c2008/Zeal010408B.gif


Since the day the CRBr10 went live, it is only up 15%. Meanwhile the CRBr9 in CCI form has soared 52%! There is really no comparison between the CRBr9 and the CRBr10. In your mind, carefully consider the blue CRBr10 line in isolation and then the red CRBr9 line in isolation. Your interpretation of this commodities bull’s performance of late will vary tremendously based on which CRB you are pondering.

One has broken its support and 200dma, and is just now clawing back up to what really looks like a secular double top. In pure technical terms, this is not a market I’d want to invest in. Meanwhile the other one looks incredibly bullish. It is climbing ever higher in a beautiful uptrend while periodically bouncing off both its support and 200dma like clockwork. And its rate of ascent is not extreme so it certainly looks like a healthy secular bull, not an out-of-control bubble.

In CRBr10 terms, 2007 was a strong year but no new highs were made and commodities were merely recovering to a potential double top. But in CRBr9 terms, 2007 was an amazing year with consistent new highs emerging within a healthy unfolding secular bull. There was nothing at all to be concerned about technically and the uptrend points to continuing higher prices ahead.

So whether you are a commodities investor, speculator, or analyst, please realize that today’s CRB is nothing at all like the historical one you remember from the first half of this decade. Today’s CRB is only comparable back to July 2005, and it is utterly dominated by oil. In a very real sense, the CRBr10 is largely an oil proxy. It really doesn’t reflect other commodities’ progress all that well.

If you are trading commodities or commodities stocks, know that any CRB chart that stretches back past mid-2005 is not comparable. It compares apples to oranges and is totally useless across the tenth revision. So any time you see technical CRB conclusions reached across mid-2005, know they are nonsensical. At best the person reaching the conclusions is naïve and at worst he is intentionally misleading you. Any long-term CRB chart that mixes the CRBr9 and CRBr10 bears false witness to this commodities bull’s true progress.

If you are an analyst, and are blessed to be in a position to influence traders, for heaven’s sake please don’t use long-term CRB charts to make points! Use the CCI instead, which is perfectly comparable from today all the way back to the ninth CRB revision in late 1995. If you are using trans-2005 CRB charts to make technical points, and your readers read an essay like this one, you will instantly and irrevocably lose lots of credibility. And in this business credibility is everything. We have to tell the truth, always, and never bear false witness.

Any comparison of the CRB across its radical tenth revision in July 2005 is hopelessly flawed. The CRBr10 is nothing like the nine CRB revisions that came before it. It is an entirely new beast altogether. Now the CRBr10’s calculation methodology is valid, and superior in some ways, but it is simply not comparable with the past CRB. If you want an accurate and true reflection of this commodities bull’s progress, you have to use the true historical ninth-rev CRB now known as the CCI.

So as we head into 2008, please realize that today’s tenth-rev CRB is essentially just a proxy for oil. Oil’s swings utterly dominate this index. When oil corrects soon here as it ought to (http://www.zealllc.com/2007/oilbull.htm), the CRB is going to get pummeled down hard. It will indeed look like a double top on a long-term chart. And the commodities Chicken Littles will come out of the woodwork boldly proclaiming that “the sky is falling!” Don’t believe it.

Instead look to the old-school Continuous Commodity Index, where the historical ninth-rev CRB we all know and love lives on in new form. An oil correction will weigh on it too, but the CCI will probably only get dragged back down to support at worst. I am all but certain that even the most wicked oil correction you can imagine won’t be enough to cause the CCI to fall under its support and break its uptrend. With oil’s traditional equal 5.9% weighting and geometric averaging, it just can’t do that much index damage.

At Zeal we live to study and trade the markets, so we really pay close attention to stuff like the tenth CRB revision that can really trip up investors who aren’t aware of it. As students of the markets we constantly strive to deeply understand them. We have to be accurate and truthful in our analysis and we don’t want to mislead anyone. So we won’t foist off some long-term chart as comparable if it is not in reality.

Even before I learned of the wonderful CCI’s existence, we remained big commodities bulls through the entire CRBr10 breakdown. From our research we knew it was just a temporary oil thing. And we continue to be very bullish today, buying elite commodities stocks to amplify the gains in their underlying commodities. Despite periodic bearish analyses claiming the contrary, this commodities bull is very much alive and well, thriving really, today. Fortunes continue to be won.

We just published the popular new January 2008 issue of our acclaimed monthly newsletter (http://www.zealllc.com/intelligence.htm) that has our outlook for key commodities sectors in early 2008. Subscribe today (http://www.zealllc.com/subscribe.htm) to get our latest cutting-edge analysis and see the actual real-world trades we are making based on all our research. First-time e-mail-PDF-edition subscribers will even receive a complimentary copy of this new newsletter, with your formal subscription starting next month.

The bottom line is the flagship CRB commodities index, if charted across its tenth revision in mid-2005, bears false witness. It misleads traders into assuming that the ninth-rev and tenth-rev CRBs are comparable even though nothing could be farther from the truth. The only truly comparable CRB is the CCI, which continues the ninth-revision CRB’s components, weighting, and calculation methodology.

If you see someone trying to draw technical CRB conclusions across mid-2005 without using the CCI, know you are being misled. Odds are the analyst is merely naïve, but in some cases the false witness may be intentional to further the analyst’s own hidden agenda. You can’t thrive and trade optimally during a secular bull without a comparable and accurate yardstick to measure its entire bull-to-date performance.

Adam Hamilton, CPA
January 4, 2008
Subscribe (http://www.zealllc.com/subscribe.htm)

[Lukester]

This post is in reply to Grapejelly's observations above - iTulip's "bullion aficionado" par-excellence:

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2008: Year of Reckoning? a quick article in Forbes - Brent Harmes = Jan 07, 2008

The main stream press is finally waking up to the economic realities that are starting to affect us here and now. The January 7, 2008 Forbes magazine has an article by Ernest Zedillo, (former President of Mexico and current Director of The Yale Center for the study of Globalization) titled, 2008: Year of Reckoning. This article is written by a very studied and intelligent man that has seen first hand the effects of currency and borrowing problems. ... (http://silverstrategies.com/story.aspx?local=0&id=10507)

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2008: Year of Reckoning? a quick article in Forbes

What lies dead ahead for our economy.


The main stream press is finally waking up to the economic realities that are starting to affect us here and now. The January 7, 2008 Forbes magazine has an article by Ernest Zedillo, (former President of Mexico and current Director of The Yale Center for the study of Globalization) titled, 2008: Year of Reckoning. This article is written by a very studied and intelligent man that has seen first hand the effects of currency and borrowing problems. He sees major problems dead ahead for the global economy and I think he absolutely hits the nail on the head with his analysis. Here are a few quotes from that article along with my comments:

“The remarkable expansion in world output since 2003 has existed in tandem with so called global imbalances-huge current account deficits in the U.S. matched by surpluses practically everywhere else.”

Translation for non-economists: Everybody is doing great now because other countries have been willing to sell us real products such as cars and plasma screen TV’s in exchange for money that the US is just making out of thin air. This has caused the global economy to boom as we massively consume and they have the” privilege” to massively produce stuff for us (in exchange for this blizzard of money we are making).

“But for every apprehensive view of global imbalances, there have been one or more explanations of why those imbalances are not only good but sustainable.”

No one really wants this imbalance to end. We enjoy the cheap goods and they are enjoying the opportunity to employ their people and build new factories and cities so we make up stories about “why it is different this time”. The problem is that these imbalances are growing at an increasing rate. It is just not sustainable forever, and it has already been going on for years.

“Recently, however, the basic assumption underlying this belief has been called into question, as market confidence in a wide array of assets offered in U.S. financial markets abruptly collapsed. The meltdown of the subprime mortgage market, big banks moving huge exotic assets into their balance sheets and looking desperately (and expensively) for fresh capital, and the Federal Reserve cutting interest rates and seeking new ways to inject liquidity into markets are all part of the credit-crunch drama.”

In fact the end of “forever” might be now. The whole unbalanced financial system is getting a test. A very big test. Here is a chart of the banking sector compared to the S&P 500 index. It is comparing the performance of the banking sector to the overall market.

http://goldsilver.com/news_jan_4/news_forbes_gsi_image_banking.png

Since our entire economic system is based on debt don’t expect any meaningful recovery until this is well on its way back up. There is no sign of that yet, not even a hint.

“A slowdown in the U.S. economy for 2008 now appears inescapable. And the probability of a serious recession cannot be ignored.”
The data sure backs this bad news up, but what can we do to protect ourselves? I think the answer lies in the next paragraph.

“There’s only so much that can be done with monetary policy without risking serious undesirable consequences, such as fueling inflationary expectations or creating severe moral hazard.”

In fact they are already using monetary policy too much, in fact that is what caused this bubble in the first place (too much currency being created). I would argue the price of gold and silver are saying that “inflationary expectations” and “severe moral hazard” are already being anticipated, if not here already. You see, in this environment there are very few financial “safe havens” to run to except the precious metals (which absolutely thrive in these environments).

Here is the chart of gold.
http://goldsilver.com/news_jan_4/news_forbes_gsi_image_gold.png

Last year alone gold rose 32% in U.S. Dollars.
And the chart of silver is also racing higher.

http://goldsilver.com/news_jan_4/news_forbes_gsi_image_silver.png

“The task will prove equally daunting in other places. It is not true that other significant economies have been decoupled from the American economy. In fact, thanks to globalization, national economies have become more interdependent. This has been positive for growth but has also entailed downsides and has exacerbated policy challenges” [underlining added]

This is a huge point and I believe absolutely correct. When we start running into economic problems (like now) and start dragging the rest of the world down with us, their economies will indeed be strongly affected and they will try to rescue their economies by also printing excess money and debasing their own currencies, in fact many are already doing this. This will lead back to the “inflationary expectations” and “moral hazard” problem that gold is anticipating with our economy. But with one MAJOR difference.

This time the whole world will be buying the precious metals because we will all be experiencing the same problems at the same time. And it looks like that time could be starting soon. Expect some major volatility in everything, including the precious metals, and hang on. This time the precious metal bull is going to be absolutely massive, and it is just getting warmed up.

[c1ue]

Adam,

Do you have similar charts showing oil in the 1970-2007 period for all of the CRB versions?

I don't see it on your web site.

Just curious...